Banking sources said there was no reason for capping interest rates on NRE deposits as the sharp rise in global rates had brought down the scope for arbitrage in interest rates between Indian and overseas markets. NRE deposits are deposits by non-resident Indians denominated in rupees.
Sources said the central bank was also weighing the option of raising the ceiling on deposits. At present, NRE deposits carry an interest rate of 25 basis points over the international benchmark, London inter-bank offered rate.
Further, the RBI is also likely to bid a formal adieu to the bank rate. Sources said bank rate was no more a relevant interest rate signal to the market as most banks follow indications provided by RBI through short-term instruments such as repo and reverse repo and cut-off yields at treasury bills auctions and dated securities under the government borrowing programme.
Prime lending rates of individual banks get adjusted much ahead of a change in the bank rate. Moreover, the use of bank rate to determine interest rate for ways and means advances for the central government was also withdrawn recently.
The interest rate for ways and means advances for the new financial year 2006-07 is pegged to repo rate and not the bank rate. Repo and reverse repo rates are the rates at which the RBI manages daily liquidity in the banking system.
While liquidity is injected through purchase of securities under repo window, surplus funds are absorbed by sale of securities under reverse repo.
Currently, only export refinance availed by banks is linked to bank rate. The ceiling on NRE deposits was brought down in three tranches since September 2003 from 250 basis point above Libor to a low of 25 basis point above Libor.
The objective was to narrow down the interest rate differential between rates offered in the international market and domestic market.
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